KBC - Update on the Embedded Value

Regulated information* - 11 April 2008 (8 a.m. CET)


Highlights

As at 31-12-2007, embedded value of the Life business was 2.7 billion
euros (7.75 euros per share)

Value of new business for 2007 was 82 million euros (0.24 euros per
share); 2007 new business margin was 40% (measured on a APE basis)
and 4.4% (measured on a PVNBP basis)

Market Consistent methodology used, in line with European Embedded
Value Principles; model covers Life activities in Belgium and
European Private Banking Business Units (corresponding to 94% of the
group's Life reserves)

Explanatory memo available on www.kbc.com; analyst conference call at
10.30 a.m. CET (dial-in: [phone])


Market Consistent Embedded Value, update as at 31-12-2007
The Market Consistent Embedded Value (MCEV) reflects the economic
value of the Life insurance portfolio by projecting anticipated
future cash flows and using market consistent assumptions, among
other factors.
As at 31-12-2007, the MCEV of the Life insurance activities in
Belgium and European Private Banking stood at 2 654 million euros
(7.75 euros per share).
Before dividend payout, a value increase was recognised in the amount
of 143 million euros (0.42 euros per share) vis-à-vis the end of the
preceding financial year. The value added by the new policies written
in 2007 (Value of New Business) amounted to 82 million euros. The new
business margin on an Annualised Premium-Equivalent basis came to a
high 40%, while it stood at a high 4.4% when compared to the Present
Value of New Business Premiums. These levels, however, are lower than
those recorded in the preceding year due to the changed business mix
(less unit-linked sales).
To calculate the MCEV, the Value of Business In Force (VBI) is added
to the Adjusted Net Asset Value (ANAV). The ANAV of the Life
business, net of dividends, amounted to 1 426 million euros, while
the VBI came to 1 228 million euros.
The MCEV was adversely impacted by the prevailing financial market
context (resulting in a mark-down of the investment revaluation
reserve, which forms part of the ANAV). There was also a significant
negative impact from the goodwill paid on the 2007 acquisitions
(mainly) in Central and Eastern Europe (CEE). From a conservative
viewpoint, this goodwill amount has been fully deducted for valuation
purposes from the Belgian parent company's net asset value (however,
it was not offset by the VBI of the CEE entities since these were
excluded from the model scope). If the goodwill amount had not been
deducted, the MCEV would have been higher by another 117 million.
If equity markets had been 10% lower at the start of the cash flow
projection, the resulting MCEV would have been 7% lower. Had the
interest yield curve shifted up by 100 bps at the start of the cash
flow projection, the resulting MCEV would have been 4% lower.
Methodology and scope
KBC applies a Market Consistent Embedded Value (MCEV) framework, in
line with European Embedded Value principles.
The scope of KBC's MCEV model is the Life insurance business of the
Group's Belgium and European Private Banking Business Units. This
scope corresponds to 94% of the Life reserves and 84% of the Life
premium inflow.
The model's scope covers the entire in-house value chain from
origination to distribution of Life insurance policies. Ca. 12% of
the MCEV and ca. 14% of the Value of New Business was generated by
the Asset Management division via the management of investment units
linked to insurance policies.
To calculate the MCEV, the Value of Business In Force (VBI) is added
to the Adjusted Net Asset Value (ANAV, i.e. the adjusted shareholders
equity allocated to the Life business). The VBI equals the sum of the
discounted values of all future profits of the life portfolio. It
explicitly takes the cost of written guarantees and embedded options
into account, as well as a capital charge for non-hedgeable risks
(such as longevity, operational risks, etc.).
The Value of New Business (VNB) includes the value of the new
policies written in 2007 and is calculated in the same way as the
VBI.
The published figures do not include:
- the value of the life insurance business of the Central & Eastern
Europe and Russia (CEER) Business Unit;
- the value of the non-life insurance business;
- the value of the expected future Life business.
In our disclosures in previous years, the ANAV of the total insurance
business was taken into scope (hence, also covering the values of the
non-life business and the CEER Business Unit). This approach was
changed in 2007 to focus solely on the value of the Life business.
For comparison purposes, the 2006 figures have been restated
retroactively.

Watson Wyatt, the actuarial consultancy, carried out an independent
review of the disclosures and concluded that the methodology and
assumptions used comply with the European Embedded Value Principles
and the European Embedded Value Guidance.

Documentation and analyst conference call
An in-depth explanatory memo is available on www.kbc.com. A follow-up
telephone conference for financial analysts is scheduled for today at
10.30 a.m. CET. Dial-in: [phone].

* This news item contains information that is subject to the
transparency regulations for listed companies.